ENFORCEABILITY OF CONTRACT AS A WHOLE TO BE DETERMINED BY ARBITRATOR AND NOT A BASIS TO VACATE ARBITRATION AWARD

untitledArbitration is a form of dispute resolution that parties elect in their contracts.  With respect to construction contracts, the arbitration provision may provide that the parties will submit their dispute to the American Arbitration Association.  A benefit to arbitration is that the dispute will be decided by an arbitrator or panel of arbitrators that theoretically have expertise in the subject matter of the dispute.  A downside is that there is no great avenue to appeal or vacate an arbitrator’s award (absent very limited circumstances) even if a party believes the arbitrator misapplied the law.

 

An example of this downside can be found in The Village of Dolphin Commerce Center, LLC v. Construction Service Solutions, LLC, 39 Fla. L. Weekly D1065a (Fla. 3d DCA 2014), where an owner hired a contractor to construct a warehouse. At the time of contract, the contractor was not licensed.  The contractor became licensed after the execution of the contract.  The contractor proceeded with construction and, due to a payment dispute, recorded a construction lien.  The contractor also filed a demand for arbitration with the American Arbitration Association pursuant to its contract. The owner answered the demand for arbitration and asserted as a defense that the contract was unenforceable pursuant to Florida Statute s. 489.128 which provides, “As a matter of public policy, contracts entered into…by an unlicensed contractor shall be unenforceable in law or in equity by the unlicensed contractor.”   Section 489.128 further provides that, “[i]f a contract is rendered unenforceable under this section, no lien or bond claim shall exist in favor of the unlicensed contractor….”

 

The owner further filed a lawsuit in circuit court asking the court to declare that that the contractor’s claim of lien was unenforceable since the contractor was unlicensed at the time of contract.  The contractor asserted a counterclaim (although it is uncertain what claims were asserted) and moved to compel arbitration; the circuit court stayed the action and compelled the parties to arbitrate the dispute.

 

During arbitration, the owner never objected to the arbitrator’s jurisdiction to rule on whether the contractor’s lack of license at the time of contract prevented it from enforcing the contract and the construction lien. “The rules of the American Arbitration Association specifically state that any objection to the panel hearing an issue must be submitted with the answering statement or it is determined that the panel will have jurisdiction.”  The Village at Dolphin Commerce Center, supra.

 

The contractor prevailed in the arbitration and moved to enforce the arbitration award in circuit court.  The owner moved to vacate the award based on the unenforceability of the contract and lien under s. 489.128 (because the contractor was not properly licensed at the time of its contract with the owner).  The trial court affirmed the arbitration award and the owner appealed.

 

The issue on appeal was whether the arbitrator had jurisdiction to determine the enforceability of the contract and the lien pursuant to s. 489.128.   The Third District held that it did:

 

“[T]he issue of enforceability was submitted to the panel and neither party objected.  As such, based on the AAA [American Arbitration Association] rules, the panel had jurisdiction to determine the issue.  To ask the trial court to revisit the issue would require the trial court to step into an appellate position.   The Florida Arbitration Statutes do not provide for such.  Pursuant to section 682.13, Florida Statutes, the authority of the trial court to vacate an arbitration award is very narrow.”

The Village at Dolphin Commerce Center, supra.

 

 

The Third District, relying primarily on the United States Supreme Court’s decision in Buckeye Check Cashing, Inc. v. Cardegna, 126 S. Ct. 1204 (2006), as well as other Florida appellate decisions, maintained that when a party is challenging the legality / enforceability of a contract as a whole (versus only the arbitration provision), that determination MUST go to the arbitrator and not the court.  For this reason, the Court held, “Those cases make clear that a trial or appellate court’s view that an arbitration panel wrongly decided the issue of illegality of a contract, and specifically illegality of a contract under section 489.128, is not a basis to vacate an arbitration award.” The Village at Dolphin Commerce Center, supra.

 

 

imagesA3FNB0L2Now, there are interesting take-aways from this ruling that need to be considered: 

 

    • If a party is arguing that a contract that contains an arbitration provision is unenforceable as a whole (such as being unenforceable because the contractor was not licensed at the time of contract), that determination should go to the arbitrator and not the court.   Yet, even the Third District noted that the Fourth District in Jupiter Medical Center, Inc. v. Visiting Nurse Association of Florida, Inc., 72 So.3d 184 (Fla. 4th DCA 2011), entered a ruling that conflicted with the United States Supreme Court (and, thus, the instant ruling) by stating: “If [a] contract is found to be illegal, a prior arbitration will not prevent the trial court from vacating the award.”  The Village at Dolphin Commerce Center, supra, quoting Jupiter Medical Center, Inc., 72 So.3d at 186.  How should this be reconciled with the instant ruling?  If a party in arbitration under the rules of the American Arbitration Association wants to preserve its argument that the arbitrator does not have jurisdiction to rule on the enforceability of the contract and lien under s. 489.128, it needs to (a) timely object to the arbitrator’s jurisdiction in accordance with the American Arbitration Association’s rules to ensure this argument is not waived and (b) hope that the court agrees with the Fourth District’s ruling in Jupiter Medical Center that a court can vacate an arbitration award if a contract is found to be illegal.  More than likely, however, the court will do exactly what the Third District did in The Village at Dolphin Commerce Center by holding that the arbitrator has the authority to determine the enforceability of a contract when the legality of the contract is be challenged as whole.

 

    • If a party wants to have the ability to appeal a ruling, particularly a ruling that involves a potentially incorrect application of the law, that party should NOT agree to a contract that contains an arbitration provision.  There is no discussion in this case (and the appellate court likely did not know) why the arbitration panel overlooked the fact that the contractor was not properly licensed and/or the reasons it found that s. 489.128 did not apply.  It did appear from the opinion, however, that the contractor was not properly licensed at the time of the contract and that s. 489.128 should have applied.

 

    • Determine whether the party being hired is licensed at the time of contract. Also, if a party is required to be licensed at the time of contract, it should get licensed in order to avoid having the other party to the contract argue that the contract and/or lien is unenforceable.

 

    • Recently, I discussed the Second District Court’s opinion in Snell v. Mott’s Contracting Services, Inc., 39 Fla. L. Weekly D1053a (Fla. 2d DCA), where the Court held that the contractor’s lien was unenforceable because the contractor did not timely enforce the lien in court after receiving a Notice of Contest of Lien.  (See http://www.floridaconstructionlegalupdates.com/dont-forget-to-timely-foreclose-the-construciton-lien-in-court/).   There is no discussion in The Village at Dolphin Commerce Center whether the contractor ever moved to foreclose its lien in court. Most likely, it asserted a lien foreclosure action in its counterclaim against the owner in court that was stayed pending the arbitration.  However, if it did not, then there would remain an issue as to how the lien is enforceable if it was not timely foreclosed on in court.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

MAKE SURE CONSTRUCTION LIENS ARE PROPERLY PREPARED AND DO NOT CONTAIN ERRORS

UnknownIf a construction lien is improperly filed or contains errors, an owner will try to capitalize on the improper filing or errors in order to get the lien discharged from his property. This is what an owner should do, although he should not lose sight over the difference between a ministerial error in the lien that you do not bank your entire defense on versus a truly substantive error under Florida’s Lien Law that could give the owner leverage in the dispute (e.g., not recording the claim of lien within 90 days from final furnishing, a subcontractor/supplier not serving a notice to owner, a lien from an unlicensed contractor, or a lien that includes improper amounts for nonlienable items).

 

The recent case of Premier Finishes, Inc. v. Maggirias, 2013 WL 5338052 (Fla. 2d DCA 2013), illustrates an error in a lien (that appears ministerial at first glance) that resulted in the lien being discharged by the trial court. However, although not discussed in the opinion, this case addresses much more than an error in a lien, but an interesting licensing issue.

 

In this case, a contractor was engaged to build a house. The contractor entered into the contract under a fictitious name. However, from reviewing the case, it does not appear that the fictitious name was a registered fictitious name, nor does it appear that the fictitious name was registered as a licensed contractor. Rather, it was simply an acronym used by the licensed contractor.

 

A payment dispute arose when the owner terminated the contractor, and the contractor recorded a claim of lien and moved to foreclose the lien. However, the lien was recorded and lawsuit initiated by the contractor and not the fictitious name that entered into the contract. The owner argued that the contractor was not a proper lienor and therefore the lien should be discharged because it was not the entity that actually entered into the contract. The trial court agreed.

 

On appeal through a petition for a writ of certiorari, the Second District reversed for two main reasons.

 

First, the Court held that a contract entered into under a fictitious name is enforceable (even if that fictitious name is not properly registered). See Fla. Stat. 869.09(9). The Court explained: “[I]f Premier Finishes [contractor] was the real entity using the fictitious name when entering into the contract, it is the actual party to the contract or the contractor…and is entitled to proceed with a claim of lien against the Owner.” Premier Finishes, 2013 WL 5338052 at *3.

 

Second, under Florida’s Lien Law, a ministerial error does not invalidate a lien unless the owner can show he was prejudiced by the error. See Fla. Stat. 713.08(4). The owner will have to show how he was adversely affected / prejudiced by the error, which would require an evidentiary hearing and can be quite challenging to prove.

 

Now, what is interesting about this case is whether there was any argument that the lien should be unenforceable because the fictitious entity that signed the contract was an unlicensed contractor (assuming this is the case). Under Florida Statute s. 489.128, contracts entered into by an unlicensed contractor are unenforceable in law or in equity by the unlicensed contractor. Thus, an unlicensed contractor cannot properly lien. Instead of the focus being on the error in the lien due to the lien being recorded by the contractor instead of the fictitious entity, the argument could center on the fact that the contract was entered into by an unlicensed contractor and, therefore, the contract and corresponding lien are not enforceable. Perhaps, the owner plans on raising this argument to establish prejudice.

 

While the contractor can certainly raise arguments to address the fact that the fictitious name is properly licensed since the contractor that owns the fictitious name is properly licensed, a contractor that is required to be licensed by the state (e.g., general contractor, mechanical contractor, electrical contractor, plumbing contractor, etc.) is technically supposed to register and identify the fictitious name it is doing business under. See Fla. Stat. 489.119.  Although, notably, there is an older case, Martin Daytona Corp. v. Strickland Const. Services, 881 So.2d 686 (Fla. 5th DCA 2004), that held that a subcontractor’s failure to obtain a license under its fictitious name did not render the contract unenforceable. However, this case was decided under a previous version of Florida Statute s. 489.128 and, importantly, the current version of this statute likely would not have applied to this case since the subcontractor (a mason) is not required to obtain a state license like a general contractor. It is uncertain how this case would be decided under current law.

 

The key is to double check your liens to ensure they are accurate and do not contain errors. Naturally, it is always a good thing to work with an attorney to prepare your lien so that if you know that if an error will likely exist you can game plan accordingly.  For example, if you entered into contracts in the name of an unregistered fictitious name, the decision in Premier Finishes can support your argument that the fictitious name would not render the contract or lien unenforceable especially if the fictious name is used by a properly licensed contractor.  Also, contractors needs to be sure they maintain proper licenses to remove any argument that the contract or lien is unenforceable. Keep in mind that under the law, a contract with an unlicensed contractor is unenforceable one-way by the unlicensed contractor; the other party to the contract can still seek recourse.

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

MORE ON THE HARSH REALITIES OF CONTRACTORS NOT BEING PROPERLY LICENSED

UnknownPreviously, we posted an article about the Florida’s court’s decision in Earth Trades, Inc. v. T&G Corp., 2013 WL 264440 (Fla. 2013), which demonstrates the huge risk an unlicensed contractor undertakes by entering into a contract based on Florida Statute s. 489.128 that would render contracts by the unlicensed contractor unenforceable in law or equity.

 

Well, unfortunately for the unlicensed contractor, there are more harsh realities further demonstrated by the Fourth District Court of Appeal’s ruling in Home Construction Management, LLC v. Comet, Inc., 2013 WL 440101 (Fla. 4th DCA 2013). This case references Florida Statute s. 768.0425 which provides in material part: “In any action against a contractor for injuries sustained resulting from the contractor’s negligence, malfeasance, or misfeasance, the consumer shall be entitled to three times the actual compensatory damages sustained in addition to costs and attorney’s fees if the contractor is neither certified as a contractor by the state nor licensed as a contractor pursuant to the laws of the municipality or county within which she or he is conducting business.”

 

In Home Construction Management, an owner hired an unlicensed contractor to complete the construction of a residence. Due to issues that are not discussed in the case, the owner sued the contractor for treble damages pursuant to s. 768.0425 and recovered a judgment against the unlicensed contractor (although the appellate court found that the representative of the unlicensed contractor–likely the person that signed the contract–was not a specific party to the contract and could not be liable for treble damages).

 

Besides the unlicensed contractor being unable to enforce its contract in any way, shape, or form in the event they are not paid, they could expose themselves to treble damages under s. 768.0425 (in addition to having to pay back all funds it received as an unlicensed contractor since a party cannot profit from an illegality). Statute 768.0425 is potentially extremely harsh because this statute would extend to contractors that do not necessarily need to be licensed by the state, but need to be licensed by a local jurisdiction in which they are performing work!!!  Thus, ensuring proper licensure is important to any contractor performing work, regardless of whether that work requires a license by Florida’s Construction Industry Licensing Board.

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

THE HARSH REALITIES OF A CONTRACTOR NOT BEING PROPERLY LICENSED

imagesThe recent Florida Supreme Court’s decision in Earth Trades, Inc. v. T&G Corp., 2013 WL 264440 (Fla. 2013), demonstrates the harsh realities for an unlicensed contractor. In this case, a general contractor hired a site subcontractor. The subcontractor, alleging nonpayment, filed suit against the contractor and the contractor’s payment bond. The contractor argued that its site subcontractor was unlicensed and therefore was unable to pursue any cause of action against either the contractor or the payment bond. The contractor relied on Florida Statute s. 489.128 which provides in material part: “As a matter of public policy, contracts entered into on or after October 1, 1990, by an unlicensed contractor shall be unenforceable in law or in equity by the unlicensed contractor.

 

The unlicensed subcontractor argued what is referred to as the in pari delicto doctrine.  This doctrine stands for the proposition that a party who has knowledge and participates in the wrongdoing cannot reap the benefits of the wrongdoing. In other words, the subcontractor was arguing that the general contractor knew it was unlicensed and, thus, cannot reap the benefits of the harsh effects of the statute that would prohibit it from any remedy associated with the contractor’s nonpayment.

 

The Florida Supreme Court held that this in pari delicto doctrine does not apply even if the contractor knows that the subcontractor was unlicensed and hires the subcontractor anyway.

 

General contractors and subcontractors that are required to be licensed by the state (Florida’s Construction Industry Licensing Board) need to ensure they are properly licensed. Otherwise, if they enter into a contract with a party and despite the other party knowing about the lack of license, they will be out of luck. This could mean the other party has no legal obligation to pay it and arguably could seek to recoup monies paid to the unlicensed contractor. Obviously, this could be avoided by ensuring proper licensure, especially now that the defense “well, the other party knew I wasn’t properly licensed” no longer applies.

 

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

THE IMPORTANCE OF PROPER CONSTRUCTION CONTRACTING LICENSES

imagesFlorida law requires general contractors (and certain specialty subcontractors) to be licensed with the state of Florida. See Florida Statutes Chapter 489, Part I. This is because construction contracting, similar to other professions, is regulated. The law treats the licensure of contractors very seriously in that, “[C]ontracts entered into on or after October 1, 1990, by an unlicensed contractor shall be unenforceable in law or in equity by the unlicensed contractor.” Fla.Stat. §489.128(1). Therefore, an unlicensed contractor that performs work will be unable to enforce nonpayment, which would include not properly being able to lien or foreclose on a lien. This could financially ruin a contractor that did a great job on a project but cannot secure final payment because it was not properly licensed.

 

Contractors need to ensure they are properly licensed prior to entering into a contract with an owner. Likewise, owners need to ensure that the contractor they are hiring is properly licensed. The construction contracting licensure law can be difficult navigating; therefore, having an attorney assist with any licensure questions is important to save both contractors and owners the heartache that may ensue if proper licenses are not in place.

 

In determining whether a contractor is unlicensed, the law provides:

 

“[A]n individual is unlicensed if the individual does not have a license required by this part concerning the scope of the work to be performed under the contract. A business organization is unlicensed if the business organization does not have a primary or secondary qualifying agent in accordance with this part concerning the scope of work to be performed under the contract. For purposes of this section, if a state license is not required for the scope of work to be performed under the contract, the individual performing that work is not considered unlicensed.
***
[A] contractor shall be considered unlicensed only if the contractor was [a] unlicensed on the effective date of the original contract for the work, if stated therein, or if not stated, [b] the date the last party the contract executed it, if stated therein. [c] If the contract does not establish such a date, the contractor shall be considered unlicensed only if the contractor was unlicensed on the first date upon which the contractor provided labor, services, or materials under the contract.” Fla.Stat. §489.128(1)(a), (c).

 

Recently, in Austin Building Company v. Rago, Ltd., 2011 WL 1563797 (Fla. 3d DCA 2011), the Third District dealt with the issue of whether a general contractor and subcontractor where properly licensed. In this case, an owner entered into a contract with the properly licensed general contractor (“GC”) in March 2005 for the construction of a condominium in Miami. The contract provided that once the GC’s affiliate (“Affiliate”) became a licensed general contractor in Florida, the GC would assign the contract and related documents to the Affiliate.

 

After the execution of the contract, GC engaged a structural concrete subcontractor (“Subcontractor”) that immediately commenced work in April 2005 without a formal contract in place. Months later, the Affiliate became licensed and formally executed the subcontract with the Subcontractor. The Affiliate, however, terminated the Subcontractor due to the Subcontractor’s defective work and, as a result, the Subcontractor sued the GC, the Affiliate, and their payment bond for nonpayment, and the Affiliate countersued the Subcontractor. Both parties moved for summary judgment arguing that the other was not a properly licensed contractor and, therefore, should not be entitled to enforce the subcontract.

 

The Third District Court of Appeal found that there remained a question of fact as to whether the GC or the Affiliate served as the general contractor when the Subcontractor started performing work. Notably, at the time the Subcontractor started performing construction activities without a contract, the Affiliate was not a licensed contractor. However, the GC was licensed. If the GC was the contractor at the start of the Subcontractor’s performance, the GC and/or the Affiliate should be in a position to enforce the Subcontract (which would seem to be the case given that it was contemplated when the owner hired the GC that the GC would eventually assign the contract and related documents to the Affiliate when the Affiliate became licensed). However, if the Affiliate is deemed to be the contractor at the start of the Subcontractor’s performance, then the Affiliate should not be able to enforce the subcontract to recover sums associated with the Subcontractor’s defective work because it was admittedly not a licensed contractor when the Subcontractor commenced performance.

 

The Third District further found that the Subcontractor did not need to be licensed and could enforce the subcontract. Although the case does not fully explain, it remains uncertain as to what activities the concrete Subcontractor performed that would have required a state license.

 

This case reveals the importance of proper construction contracting licenses. If the Subcontractor was not properly licensed with the state, then it would have no avenue to recover for nonpayment. This is difficult for many under capitalized subcontractors that rely on timely payments to fund their operations. On the other hand, if the contractor was not properly licensed, then it would have no avenue to recover against the Subcontractor for defective work. This would then make the contractor directly responsible for the Subcontractor’s work without any true avenue to recoup its costs against the Subcontractor.

 

For more on contractor licensing, please see: http://www.floridaconstructionlegalupdates.com/more-on-the-harsh-realities-of-contractors-not-being-properly-licensed/

and

http://www.floridaconstructionlegalupdates.com/the-harsh-realities-of-a-contractor-not-being-properly-licensed/

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.